Chart of the Day: COE premiums and housing rentals continue to rise

Prices are unlikely to ease off as quickly as hoped, says OSK-DMG.

OSK-DMG noted:

Inflation remained elevated at 5.1% in 1H12 on the back of tighter COE supply and rising housing rentals but is expected to ease thereafter. Prices are likely to moderate as a result of weaker oil prices, the government’s responses to mitigate domestic conditions driving inflation higher and favorable base effects.

However, prices are unlikely to ease off as quickly as we hoped on the back of elevated accommodation cost and we have re-worked our full-year forecast to reflect this with 3Q and 4Q headline inflation expected to rise by 3.5% and 3.4% yoy respectively vs. 3.4% and 3.0% previously.

For the full-year, we now expect headline inflation to average 4.3% this year (from 3.8% previously), which at the upper end of MAS and MTI’s inflation estimates of 3.5-4.5% (they also expect inflation to come in at the upper half of its forecast range this year). But there could be still be further upside to our forecast if oil and food prices surge on escalating tensions in the Middle East and changing weather conditions.

As for exchange rate policy, we do not expect any changes to MAS’ policy stance of a modest and gradual appreciation of the Singapore dollar given that economic growth is likely to underperform and inflation elevated.

However, looser policy is also possible if the global environment deteriorates as a result of the ongoing crisis in the Eurozone.